October 2008 The Korean Economy: Resilience AmidTurbulence The Korean Economy: Resilience Amid Turbulence

1. Macroeconomic Performance 2. Current Issues & Answers

104, 162, , 153, , 37, , 164, , 51, , 227, 17 32, 57, , 153, , 255, , 126, Stable GDP Growth and Downward Trend in Inflation Korea shows robust GDP growth Average GDP Growth Rate in Average GDP Growth Rate in 1H CPI – Headline (%) & WTI trend (US$) Downward trend in consumer prices

104, 162, , 153, , 37, , 164, , 51, , 227, 17 32, 57, , 153, , 255, , 126, Improving Current Account Surplus 2008 Current account balance (US$ bn) Current account balance would turn to surplus in 4Q ~ 4.0(e) Robust export growth Diversified export products Diversified export markets Source: Bank of Korea -8.5~-9.0(e) China 22.1% North America 13.3% EU 15.1% ASEAN 10.4% Japan 7.1% Others 19.8% Central & South America 6.9% Middle East 5.3% Source: KITA, as of 2007 Exports (US$ bn, YoY Growth, %) % % % % % % Sep.08 Export (USD billion) 23.0%

104, 162, , 153, , 37, , 164, , 51, , 227, 17 32, 57, , 153, , 255, , 126, 167 Much Room for Monetary and Fiscal Policy 5 Source: Bank of Korea, Datastream Korea policy rate trend (%) CountryPriorCurrentChange US △ 0.50 EU △ 0.50 UK △ 0.50 Sweden △ 0.50 Swiss △ 0.25 Canada △ 0.50 China △ % △ 0.25% Much room for monetary and fiscal policySimultaneous policy rate reduction by 7 countries Policy rate (October 8, 2008)

104, 162, , 153, , 37, , 164, , 51, , 227, 17 32, 57, , 153, , 255, , 126, Prudent Fiscal Position Lower debt level than OECD peersKorea continues to produce fiscal surpluses Source:Ministry of Strategy and Finance Surplus well above its peers Source:S&P Sovereign Risk Indicator, July 2008, 2008 forecast data OECD Average: 77% Government surplus (% of GDP) Consolidated government balance (% of GDP)Government net debt to GDP (%) Source:OECD; IMF (Korea data). According to OECD, Korea’s debt to GDP ratio is 26.5%

1. Macroeconomic Performance 2. Current Issues & Answers

104, 162, , 153, , 37, , 164, , 51, , 227, 17 32, 57, , 153, , 255, , 126, Korea’s External Debt Level is Too High? $144.7bn (34.5% of total) without default risk Source: Bank of Korea No risk External debt structure (US$ bn) Most of short-term external debt by foreign bank Large portion of external debt comes from currency hedging by banks and exporters Source: Bank of Korea Domestic bank Foreign bank branch Total external debt by bank (US$ bn) Short-term external debt by bank Domestic bank Foreign bank branch

104, 162, , 153, , 37, , 164, , 51, , 227, 17 32, 57, , 153, , 255, , 126, Korea’s Foreign Reserves are not liquid? Adequate amount of foreign reserves FX reserves (US$ bn) 6th largest reserves globally (August 2008) 1 Includes Hong Kong (AA+), Slovenia (AA), Portugal (AA-), Italy (A+), Chile (A+), Czech Republic (A) and Estonia (A). Credit ratings by S&P. Source: IMF. Median of peers 1 : US$ 29.2bn FX reserves (US$ bn) Source: Bank of Korea Highly liquid foreign reserves Deposit 22.0 (9.2%) Total reserves (US$ bn) Korea has 6th largest foreign reserves worldwide and most of the foreign reserves are highly liquid Mostly AA-rated or above bonds (90.6%) 1,808 Others 0.5 (0.2%)

104, 162, , 153, , 37, , 164, , 51, , 227, 17 32, 57, , 153, , 255, , 126, 167 Korean Banks Have a Serious Liquidity Problem? 7-day maturity mismatch ratio (%) 3-month foreign currency liquidity rate (%) High liquidity ratio: Low risk from duration mismatchNo currency mismatch exists OperationAmountFinancingAmount Forward exchange purchased (off B/S) 65.7External debt127.4 Foreign loans 1) 45.5 Residential deposits in foreign currency 19.3 Trade bill discount operation 50.5 Swap with foreign bank branches 2) 23.0 Others (Securities, deposits, etc.) 40.0 Swap with bond investors 2) (foreigners) Supported by government’s consistent and strict management, currency mismatch and duration mismatch have been minimized Guidance: 85% 7-day Guidance: 0% Foreign currency financing/operation - Korean banks (US$ bn, as of Jun.08) 1) NPL : 0.3%, 2) Estimates (not included in liabilities)

104, 162, , 153, , 37, , 164, , 51, , 227, 17 32, 57, , 153, , 255, , 126, 167 Source: Financial Supervisory Service Loan to Deposit Ratio is Too High? 11 Loan to deposit ratio has stayed low during recent years Moderate loan to deposit ratio Loan to deposit ratio (%) * US : 112%(Including CD, Jul 2008)

104, 162, , 153, , 37, , 164, , 51, , 227, 17 32, 57, , 153, , 255, , 126, Real Estate Bubble will burst? Improving loan to value ratio Stricter regulation on mortgage than other countries Dramatic growth of financial assets 1 2 Source: Bank of Korea Financial Stability Report, April Financial Surplus = Financial Asset Increase - Financial Liability Increase. 2 Financial assets and liabilities exclude trade credits and other miscellaneous non-interest-bearing financial assets and debts. Financial surplus (KRW trn) LTV ratio (%) Government’s strict DTI and LTV regulation has enhanced household finance soundness KoreaU.S. Hong Kong GermanyJapan Mortgage/ GDP 33.4%72.3%37.3%52.4%36.2% Regulation System DirectIndirectDirectMixedIndirect LTV Limit40~60%-60~70% 60% (Portion) Indirect DTI Limit40%-60%--

104, 162, , 153, , 37, , 164, , 51, , 227, 17 32, 57, , 153, , 255, , 126, 167 Government Plan to Stabilize Financial Market 13 Two of the five financial stabilization measures would be sufficient in current condition Should the need for additional steps arise, appropriate measure will be enforced Measures Policy Providing liquidity External debt guarantee Acquisition of insolvent debt Recapitalization Increased guarantee on bank deposits Country US, UK, Germany, Australia UK Australia US US, UK, Germany, France US, UK, HK, Germany, Hungary, Australia, Ireland Korea ● Additional US$ 30bn liquidity to be provided ● 3-year US$ 100 bn guarantee for external debt There is no need for additional steps; appropriate measures will be enforced when necessary

104, 162, , 153, , 37, , 164, , 51, , 227, 17 32, 57, , 153, , 255, , 126, 167 Korea: The Case for Investment ●Stable GDP Growth Amidst Global Downturn ●Downward Trend in Inflation ●Improving Current Account Surplus ●Prudent Fiscal Position ●Reasonable Amount of External Debt ●Sufficient Foreign Exchange Reserves ●Manageable Situation in Real Estate Sector 14 Strong Fundamentals Stable Liquidity ●Providing dollar liquidity to banks ●Government guarantees for Korean banks’ external debt ●More proactive measures prepared Governmental Measure

104, 162, , 153, , 37, , 164, , 51, , 227, 17 32, 57, , 153, , 255, , 126, Korean Economy: Positive Power Drives In history, Korea has proven its power to change crisis into opportunity Successfully Overcame Oil Shock Experience in Asian Financial Crisis More than 5000-year History ■ Tax cuts ■ Regulatory reforms ■ Global standards in financial sector Trust in Korean Economy. Positive Power Drives It

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